This Morning: Samsung Tops Estimates, Steve Jobs 1955-2011

By Tiernan Ray

Shares of Samsung Electronics (005930KS) closed up fractionally at ₩1,370,000 in Seoul trading after the company overnight reportedpreliminary Q3 revenue and operating profit that topped expectations, helped by stronger-than-expected sales of the “Galaxy S III” smartphone, despite weakness in DRAM sales.

Samsung projects ₩51 trillion to ₩53 trillion in revenue, just slightly head of the consensus ₩51.9 trillion. In a note to clients this morning, Bernstein Reseach’s Mark Newman reiterates an Outperform rating, noting that contrariety to his estimate for Samsung to sell 15 million Galaxy S III’s the company may have actually sold 20 million or so.

One year ago today, Apple (AAPL) co-founder Steve Jobspassed away after a long battle with pancreatic cancer. The Apple Web site this morning includes a photo tribute to jobs on its home page, culminating in a message posted by CEO Tim Cook, stating “his spirit will forever be the foundation of Apple.”

Speaking of Apple, Cowen & Co.’s Matthew Hoffman, who rates the stock Outperform, this morning writes that “banding” of the iPhone 5, the fact it doesn’t match all spectrum bands in the world for “long term evolution,” or LTE, wireless, means it may be disadvantaged in some markets where it can only offer 3G wireless capabilities. Hoffman hopes more SKUs of the phone will solve the problem, and he leaves unchanged his iPhone estimates.

Apple shares this morning are down $5.70, or 0.9%, at $661.10.

Shares of Zynga (ZNGA) are down 54 cents, or 19%, at $2.28, after the company last night cut its year outlook as it tries to transition from being just a Web-based video games provider. The stock got at least one downgrade this morning, from R.W. Baird’s Colin Sebastian, who cut his rating to Neutral from Outperform, and cut his price target to $3 from $6.

As Sebastian writes this morning, “It is clear that Zynga will not be able to counterbalance social gaming headwinds this year with its success in mobile and its broader network buildout […] Moreover, the company’s platform transition could extend well into 2013.”

Neil Doshi of Citigroup, who has a Neutral rating on the stock, notes this morning that ZNGA is trading at about the value of its $2 per share in cash.

Zynga’s weakness has spilled over onto Facebook (FB), which is down 53 cents, or 2.4%, at $21.43 this morning. JP Morgan’s Doug Anmuth, who has an overweight rating on the shares, cut his estimates for “Payments” revenue that Facebook receives from Zynga for next year to $582 million from a prior $797 million. However, Anmuth is not worried, because Facebook is all about ads, not payments, he writes: “Facebook’s Payments challenges further emphasize the company as an advertising story. On that front we remain bullish.”

Speaking of Facebook, Jefferies & Co.’s Brian Pitz this morning is increasingly optimistic about the company’s chances, he writes. Pitz, who has a Buy rating on the stock and a $30 price target, is especially excited about something called “Facebook Exchange,” or FBX, a kind of direct mail marketing channel. Those who use FBX tell Pitz it “will be the second or third largest channel for direct response ads over time” and compare it to Google’s (GOOG) Ad Exchange, or to the early days of keyword search advertising.

Hewlett-Packard (HPQ) shares continue to be under pressure following Wednesday’s analyst day presentation and the cut in outlook for 2013. The stock got two downgrades today, one from Argus Research’s Jim Kelleher, who cut his rating to Hold, and Sterne Agee’s Shaw Wu, who cut the stock to Neutral.

Writes Wu, “We are at a loss in identifying positive catalysts within a reasonable investment horizon and fear for further downside surprises as we believe the headwinds the company faces are likely structural and secular in nature. Also, in our sum-of-the- parts analysis, we see a bullish case scenario of $15 but more likely $10 taking into consideration a liquidity discount and decent return for a private equity buyer.”

Speaking of struggling stocks, Piper Jaffray’s Gus Richard today predicts Intel (INTC) may see some pick up in share price as a “dead cat bounce,” given that “news for Intel is so bad it is unlikely to get worse near term.”

Probably the Street will improve numbers that have been drastically slashed, he thinks: “We see improving demand as holiday builds is pushed into Q4 and comps are easy. We expect a positive Q4 estimate revision, albeit likely a minor one. We expect this to have a short-term positive impact on the shares.

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OCTOBER 5, 2012 11:07 A.M.

Ed wrote:

Tim Cook has completely failed shareholders. 659 is a joke for this stock price. He is the reason Apple is not at 800. Tired of him trying to run this company. He is now completely over his head.

OCTOBER 5, 2012 11:10 A.M.

Bill wrote:

Apple is now the most hated and manipulated stock on wallstreet. Why? Tim Cook and the Useless Team he has.

OCTOBER 5, 2012 11:44 A.M.

ValleyOracle wrote:

Just an observation
When too many diverse companies are covered in the same article/writing, it becomes a bit harder for readers to participate; the readers feelings and wanting to react or say things changes as the context changes several times within the same article. Its all tech agree; but, there are to many variations of tech and correspondingly there are readers who like (and passionate! :-)) about specific areas in tech. So it might be better to break up the article by company (best) or sector (better).

OCTOBER 5, 2012 11:46 A.M.

Tiernan Ray wrote:

ValleyOracle: Thanks for the observation, I can see your point. I'll keep that in mind.

OCTOBER 5, 2012 11:46 A.M.

Joe wrote:

Glad everyone is celebrating Steve's life while the stock continues to tank. Cake for everyone at Apple. Stock should be down 20 this afternoon.

OCTOBER 5, 2012 11:51 A.M.

DOUG KASS wrote:

Questioning iPhone Upgrade Cycle
OCT 5, 2012 | 11:12 AM EDT
Stock quotes in this article: AAPL
The question is how the valuation will react to the shift in mix.
Apple's (AAPL) shares continue to underperform.

As I pointed out earlier this week, I questioned the upgrade cycle for the new iPhone. And Bernstein must be reading my diary as the firm writes:

Surprisingly our analysis indicates that only about 30% of iPhones sold in fiscal year 2012 will be from customers upgrading from an older iPhone. The remaining 70% will come from new customers, most of whom have never owned a smartphone. Over the last two years, the majority of new iPhone subscribers have come from existing carriers.

Bernstein's report is a good one, and anyone involved should get a copy. In it, Bernstein addressed one of the major longer-term issues with Apple's stock -- namely, slowing top line growth. Given iPhone is Apple's most profitable and important product, as the mix of annual sales shifts more from new customer or exiting (or upgrades), annual growth will slow given the upgrade cycle is about two years for current customers.

But the Bernstein analysis highlights a positive result will be higher recurring revenue as a percentage of total with potentially higher cash return to investors.

The question is how the valuation will react to this shift in mix.

Position: None
More Bruises on Apple
OCT 3, 2012 | 9:37 AM EDT
Stock quotes in this article: AAPL, SNE, RIMM, MSFT, GOOG, NOK
I have some additional concerns about the tech juggernaut.
Pride goeth before a fall -- also publicity, handshakes and celebrity. The biblical injunction about the first and the last trading places often has literal truth. Thus, stocks and bonds, which fared poorly in the inflationary 1970s, excelled in the disinflationary 1980s. The country's most admired companies (as listed annually in the glossy business magazines ) are frequently on their way to becoming among the country's least admired investments. When a cynical investor hears that there are too many optimists in the market, he will begin to worry. By the same token, an over-abundance of pessimists will give him courage. After all, he may ask, if everyone is already bearish, who is left to sell?

Apple (AAPL) has truly become the investment tail that wags Mr. Markets' dog -- its shares literally have a hold on the market, and the company's large index weighting seems to be responsible for almost every market wiggle.

Ten days ago, I wrote "The Bear Case for Apple," in which I cited the following 10 concerns:

Quality vs. price: Apple is now selling less or equal for more money. The company used to sell a better product for more money, which is a great strategy. Its products were simply market-defining, and competitors were not close. Recently, however, things have changed, and competitors have caught up. Now Apple is selling an equal to worse product than the competition for more money (both phones and tablets). That strategy cannot work forever. This is the biggest issue.
Delivering a more complicated product: Products are also getting more complex and Microsoft-like. Apple's challenge is to deliver ever more complicated products (with a lot of new components) in sufficient quantities. See most recent Foxconn issue. Previously, we would never have seen such a story because there were never issues and nobody would dare voice them, especially not an avowed Apple zealot like the author of this interesting article.
The Oracle of Cupertino: Steve Jobs is no longer around to convince consumers that his products are magical. There is no longer a single visionary voice, especially with the vision of Steve Jobs. There are stories floating around about internal disagreements and power struggles given the unique void created by the loss of a single dominant figure in an unusual corporate structure that he controlled.
Increasing product homogeneity: Apple no longer has a huge ecosystem advantage. Most if not all the apps that consumers care about are available on Android and Microsoft (MSFT), which can also run Office apps such as Excel that Apple doesn't. The first-mover advantage might be lessened or lost if Apple continues to try to do everything on a proprietary basis -- for instance, maps (and who wants a smartphone with bad maps?).
Economic headwinds: Some of the markets served by Apple are saturated, and in a worldwide economy facing strong headwinds, consumers may balk at a product that can be purchased at much lower prices from competitors. Until last quarter, Apple never missed consensus expectations during a product transition. There is more to last quarter's miss than transition.
Poor economic proposition for Apple's partners: Apple's carrier partners do not like the economics they give to Apple. Apple's partners have shown that they can and will shift to the good alternatives that consumers seem to like (e.g., Samsung Galaxy).
Roadblocks to new initiatives: Potential business partners in general do not like or trust Apple relative to other initiatives. The music industry and AT&T (T) have not had great experiences with Apple, and the company might find it hard to sign deals for new initiatives.
Product cannibalization: The iPad mini may cannibalize the higher-margin iPad -- or just be a neutral at best.
Growing size mandates delivery of more product blockbusters: An investor better believe in a huge new blockbuster product next year. TV is complex due to relationships with cable companies, set-top box manufacturers and channel guide programmers. Google may one up Apple in the space, as it owns Motorola's set-top box division and has Google Voice already. If it comes to integrating more complex solution for TVs with content, cable companies and other media partners have learned not to trust Apple given the poor outcomes other Apple partners have had (e.g., music industry, AT&T, etc.).
Valuation: Apple's stock is cheap on a P/E basis but arguably very expensive on price/sales (4.4x) and total absolute market capitalization basis ($625 billion).
Back on Sept. 24, Apple's shares traded above $700 a share and have since dropped by about 6%, a far larger decline than the broader market indices.

With the same caveat that I fully recognize that Apple's revenue and margins in the December quarter will be very good due to the fastest ever global rollout of the iPhone 5, this morning I wanted to raise some additional concerns.

Apple is losing some mojo and mindshare. The Samsung Galaxy ad goofing on Apple for all its deficiencies and customer-unfriendly practices is a leading viral video. Samsung's campaign for the Galaxy S III, a phone released in June, beat out Apple on Ad Age's Viral Video Chart last week. The Galaxy S III campaign snagged 13.2 million views. And although the campaign had been on the chart for three weeks prior to this one, the iPhone launch helped it increase its views more than seven times and jump from No. 5 to No. 1.

Last week I went into one of Apple's New York City stores. It was not as nearly busy as my last visit in August. The key going forward is new customer ratio in stores. I asked around, and it seemed that old customers dominated the store's population. Are we seeing some fatigue in the installed base? Are buyers taken aback by the new adaptors that lack compatibility with the old phone adapters? I don't know. I do know that I played with the iPhone 5 for about a minute and got quickly bored. Bottom line: This is the first product launch by Apple with no wow factor and much less cool than other products on the market such as Samsung Galaxy S III and HTC One X.

Can Apple keep the well-above-cellphone-industry-average customer upgrade cycle going? With Steve Jobs gone, Apple is at risk of losing that magical Walt Disney feeling. This is what Apple had going for it. The dogs just wanted to eat the dog food -- no matter what. It was delusional at times. Apple could beat them and customers would come back and beg for more. But the company will lose this cachet. As I mentioned last week, almost all of a sudden, Apple's suite of products is becoming more expensive and no better to worse than other products on the market. Eventually, this will hurt Apple.

Importantly, Apple had really leveraged its unique customer position in a way that benefited revenue and gross margins. The company had been able to get away with some unfriendly customer practices. Examples include:

proprietary connectors that lock people into Apple peripherals or third-party ones on which Apple gets a royalty (we would not have had this latest connector fiasco if the iPhone 5 was on industry standard micro-USB that is much more convenient for customers who can share chargers, same points of connectivity, etc.);
leaving basic features out of phone launches to capture annual upgrades to the next phone (only 2 megpixel camera, no video recording, late with 4g by a year, etc.), generating excess revenue and margin from a much higher-than-average turnover rate; and
other customer inconveniences that give Apple more margin (no Nand card slot, can't change battery).
Samsung picks on a lot of this stuff in the advertisement previously mentioned. All this proprietary stuff is done to capture more margin -- it does not make life easier for the consumer -- just like what Sony (SNE) tried to do all the time, and we all know how that company ended up (as well as most other proprietary tech ecosystems, with Research In Motion (RIMM) being the latest one). See this older article on the Apple "tax."

Also, Apple has started to experience Microsoft-like virus problems, and Apple's well-publicized customer service response has been dismissive and poor.

How much longer can Apple treat customers this way and extract extraordinary excess gross margins by d

OCTOBER 5, 2012 11:59 A.M.

Sally wrote:

Tim Cook has reached his ceiling of management. Apple is done. Tim, give the torch to Google, who will run with it through 2013. They are the new leaders of tech and for Wallstreet. Tim, we thank you for watching the store for 1 year.

OCTOBER 5, 2012 2:22 P.M.

Joe wrote:

Let's file some lawsuits! That's it! What a
great idea. Let's see what the first one
did, Samsung is up 8% and Apple
is down 5% and Apple won! Sound Like
a plan. Tim, go file some more on Steve's
day and we should be good for another 10
point drop! Hurry you have 2 hours! Here's
looking at you Steve!

OCTOBER 5, 2012 2:34 P.M.

Ed wrote:

Why does the author waste time putting
in Kass's book on shorting Apple?

About Tech Trader Daily

Tech Trader Daily is a blog on technology investing written by Barron’s veteran Tiernan Ray. The blog provides news, analysis and original reporting on events important to investors in software, hardware, the Internet, telecommunications and related fields. Comments and tips can be sent to: techtraderdaily@barrons.com.